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Monday, October 02, 2006

Oil 'Primary Driver For Gold Now'

MarketWatch reports on the precious metals. "Gold futures fell Monday, but closed above $600 an ounce for a fourth session in a row as traders weighed expectations for higher gold demand against a drop in energy prices and uncertainty surrounding the U.S. economy and interest rate moves. December silver climbed by 10 cents, or 0.9%, to close at $11.64 an ounce Monday."

"Gold for December delivery fell by 90 cents to close at $603.30 an ounce on the New York Mercantile Exchange, reversing course after trading as high as $609.20 earlier. The contract tallied a two-session decline of $7.60"

"Weakness in the U.S. dollar likely helped to provide some support to gold prices Monday, with the greenback losing ground against the yen and euro. The dollar fell after a mixed batch of economic reports boosted expectations that interest rates in the U.S. have peaked and may even decrease soon."

"October platinum closed up $12 at $1,153.20 an ounce while December palladium fell by $2.25 to end at $314.15 an ounce."

"Gold dipped Monday as lending activity out of Europe overcame the bullish effects of a weaker U.S. dollar, observers say. 'I think that if you look at what's been happening recently is that prices have been knocked down while London is open,' says Neal Ryan, director of economic research at the coin dealer Blanchard. 'That's where the vast majority of leasing activity is located.'"

"Gold in New York fell for a second straight session as energy costs tumbled. 'Oil is the primary driver for gold now,' said Mike Sander, a commodity broker at Altavest Worldwide Trading."

"'I see no rush to re-enter,' said William O'Neill, a partner at commodity research firm Logic Advisors. 'Obviously, oil has been and will remain an important influence, not only for gold, but commodities in general. We have advised our clients to stay sidelined.'"

"Prices opened higher on speculation demand may pick up in the fourth quarter. Physical demand accounted for 73 percent of purchases last year, according to the producer-funded World Gold Council. Jewelers, the biggest buyers, reduced purchases in the first half of this year because of higher prices."

"'The gold price is always driven by physical demand,' said James Turk, founder of GoldMoney.com, which had $155 million worth of gold and silver in storage for investors at the end of August. 'Physical demand for gold under $600 will keep the market above this level.'"

"Analysts at MKS Finance said the yellow metal lost ground then was later 'deadly quiet' before light fund selling forced oil down more than a dollar, dragging gold with it. 'We believe that gold will continue to draw direction from the U.S. dollar and crude oil price fluctuations in the short term,' the analysts said. 'Strong physical demand is providing a support, with for example, Turkish gold imports jumping 46.7 percent in September compared with a year ago.'"

One could argue that a decrease in political tensions is behind the lower oil price as well. There is so much liquidity sloshing around the globe, I think we may be headed back to the inflation/deflation debate and Fed watching. But gold is currently stuck between the 200 DMA above and the $600 psychological level below. Should be interesting to see which is broken first.

From an FSO article, "...One cannot regard inflation as an aggregate concept. That is the principle failing among analysts in the gold community. .... To ask whether deflation will overtake inflation is the wrong question. Rather, the issue is to what degree inflationary forces grow at the same time of growing deflationary forces, and which groups flip flop into deflation like housing is now. Banks own too many mortgage bonds. Their MBS portfolios is soon to endanger the banking system. At that time, watch gold fly, and soar like a sleek beautiful bird. My forecast is for the USTBond 10-yr yield to fall to the 4.0% level. The bank distress will initially present USTreasurys once again to be a safe haven. When the USEconomy suffers mightily from the USDollar decline, written in stone, gold will rise without interruption. " After I read this part of HOUSING OUT OF THE BOX, I still think that THE thing to watch then is MBS trouble, or the unwinding of the yen carry trade, at that point the Fed lowers rates. Time to buy Au? Not too long after that as the 10 year USTbonds begins to fall, the Fed raises rates again. End of the Au buying. Does that sound about right? That is market timing eh. But with the PPT anything can happen, for awhile anyway.

I would not worry much about this latest downturn in Gold.I believe this is the last one and we will reach bottom here. It doesn't mean it will spring toward the sky from the button. I expect just a bounce. It will rather rest for awhile (long weeks, possibly months). While in resting period the excess of "weak hands" will be shaken out. I think that lack of price movement is equally discouraging to price going downward, partially for the reason, that news makers don't report on the nonvolatile assets. And after the quiet month it will start to move up. Unnoticeably for most.Patience, Brothers.